Monday, October 18, 2010

The Inventory Bounce

Dear oh dear oh dear...

More evidence today that the little spurt of growth we had at the end of '09 and begining of '10 was a classic inventory bounce whereby at the onset of a recession, businesses find their inventory getting too big because of the reduced demand, so they cut back production more than just what they need to satisfy that new demand so that they can draw down their inventory. Then, when inventories are depleted, the have to ramp up production somewhat but just to meet the new, lower, demand. It looks like we are back to expansion, but it was really just an illusion.

U.S. Output Down For First Time Since Recession
by THE ASSOCIATED PRESS

October 18, 2010

Industrial production fell in September for the first time since the recession ended, as weak consumer demand led factories to pull back.

The Federal Reserve said Monday that output at the nation's factories, mines and utilities dropped 0.2 percent last month.

Industrial production grew 4.8 percent in the July-September quarter, slower than the 7 percent gains in each of the first two quarter of this year.

Factory output, the largest element of industrial production, fell 0.2 percent last month. Manufacturing posted monthly gains for the first year after the recession ended in June 2009. But since then it has fallen twice in the past four months.

Manufacturing has helped drive economic growth as businesses restocked and replaced worn-out equipment. September's decline could slow that trend. Without consumer demand to take up the slack, industry can't maintain its strong growth.

Production of construction and consumer goods dropped last month as high unemployment made Americans reluctant to spend. Lower production of automotive products, appliances, and energy offset a small gain in business equipment production. Production of machinery and electrical equipment also fell.

American factories were operating at 74.7 percent of their capacity in September, down 0.1 percent from August. That was the first drop since June 2009, when the deepest recession since the Great Depression ended.

So what is the answer? Well, to me, I think the evidence that the stimulus was not big enough is convincing (and many economists thought this at the time the policy was being debated). I have always thought that it needed to be bigger but that there is a point at which you can't just spend so much money effectively. So I thought the original stimulus bill was appropriate.

But what I have always thought and still think today, is that we are completely missing the low-hanging fruit: block grants to the states. Immediate and real stimulus to prevent states from having to make so many damaging cuts, especially to education, the very foundation of our future prosperity.

Subscribe To The OEB

@OregonEconomics Twitter Feed

Translate This Blog!

Beeronomics

Check out my dedicated beer blog which is a compilation of all of my Beeronomics posts that also appear here as well as lots of other beery stuff. Click here to visit the Beeronomics blog, or browse the latest posts below.

About Me

Mission Statement

This blog seeks to comment on economic issues that matter to the state of Oregon. These issues may be local, state or national but in some way matter to Oregon and Oregonians. The goal of this blog is to eschew politics as much as possible and give an economist's perspective on economics and public policy as it relates to Oregon.

Disclaimer

The opinions expressed on this site are my own and do not represent the opinions of Oregon State University or the OSU Department of Economics.